FDIC and Other Banking Agency Litigation Against Auditors, Law Firms, Appraisers and Other ...

122 Pages·2014·3.25 MB·English

by  Erika Simon

Presenting a live 90-minute webinar with interactive Q&A
FDIC and Other Banking Agency Litigation
Against Auditors, Law Firms, Appraisers
and Other Outside Advisors
Latest Developments in Defending Agency Claims and Maximizing E&O Insurance Coverage

T HURSDAY, AUGUST 7, 2014
1pm Eastern | 12pm Central | 11am Mountain | 10am Pacific
Today’s faculty features:
Roberta D. Anderson, Partner, K&L Gates, Pittsburgh
Thomas P. Vartanian, Partner, Dechert, Washington, D.C.
John K. Villa, Partner, Williams & Connolly, Washington, D.C.
Ryan T. Scarborough, Partner, Williams & Connolly, Washington, D.C.
The audio portion of the conference may be accessed via the telephone or by using your computer's
speakers. Please refer to the instructions emailed to registrants for additional information. If you
have any questions, please contact Customer Service at 1-800-926-7926 ext. 10.
Bank D&O Defense Manual
by Thomas P. Vartanian and Robert H. Ledig
LLP
Bank D&O Defense Manual
By Thomas P. Vartanian and Robert H. Ledig
Preface
Therecentfinancialcrisishasresultedinthelargestnumberofbankfailuressincethesavingsandloan
crisisinthelate1980sandearly1990s(“S&LCrisis”). InMarch1982,astheGeneralCounseltoboth
theFederalHomeLoanBankBoardandtheFederalSavingsandLoanInsuranceCorporation(whichwas
latermergedintotheFederalDepositInsuranceCorporation(“FDIC”)),Iintroducedthepoliciesand
standardsuponwhichdirectorsandofficersoffailedbankswouldbeheldresponsibleforany
misconduct. Thosepolicieswerefollowedbyasimilarstatementissuedin1992bytheFDIC.
DuringtheS&LCrisis,directors,officers,attorneys,accountantsandotherprofessionalsbecamethe
primetargetsoflitigationconductedbytheFDICandtheResolutionTrustCorporation(“RTC”)seeking
torecoverlossessustainedbyfailedbanks. IntheaftermathoftheS&LCrisis,theFDICandtheRTC
broughtsuitorsettledclaimsagainsthundredsofformerdirectorsandofficersoffailedbanksand
recoveredapproximately$1.3billioninclaimsagainstformerdirectorsandofficers. TheFDICisnow
againinitiatinganaggressivelitigationstrategyagainsttheformerdirectorsandofficersofrecentlyfailed
banks.
Inpreparationforthislatestwaveoflitigation,theFDIChasbeenincreasingitsinternallegalstaffand
engagingoutsidelawfirmstoperformprofessionalliabilityinvestigationsandtoprosecuteclaims. To
date,theFDIChascommencedtwenty-ninelawsuitsasofApril25,2012againstformerdirectorsor
officersofrecentlyfailedbanks. Inaddition,theFDIChasannouncedthatithasauthorizedlawsuits
against493individualsforD&Oliabilityinconnectionwithrecentlyfailedbanksinanefforttorecoup
over$8billioninlosses.
Whileseekingtorecoverfromthoseresponsibleforabank’sfailureisafundamentalpartofanysystem
thatincludesafederalsafetynet(suchasFDICdepositinsurance),theFDIC’sdecisiontocommence
failedbanklitigationshouldnotbeinfluencedbyadesiresimplytocollectdamagesfromanyonewho
happenedtobeatthesceneoftheaccidentwhenthebankfailed,whetherornottheywereresponsiblefor
thebank’sfailureoritslosses. AnydecisionbytheFDICtosuetheformerdirectorsandofficersofa
failedbankshouldonlybemadeincompliancewiththehigheststandardsexpectedofafederalagency
whenitmountsanattackonanindividual.
Thisguidehasbeenpreparedtoassistdirectorsandofficerswhomaypotentiallyfindthemselves
oppositetheFDICinalawsuittounderstandhowtoavoidaninvestigationortorespondaseffectivelyas
possible.
Thomas P. Vartanian
Washington,D.C.
©2012DechertLLP.Allrightsreserved.Materialshavebeenabridgedfromlaws,courtdecisions,andadministrativerulingsandshouldnotbeconsideredas
legalopinionsonspecificfactsorasasubstituteforlegalcounsel.Thispublication,providedbyDechertLLPasageneralinformationalservice,maybe
consideredattorneyadvertisinginsomejurisdictions.Priorresultsdonotguaranteeasimilaroutcome.
BankD&ODefenseManual
FDIC Professional Liability Investigations
Aninsureddepositoryinstitution(“bank”)failswhenitisseizedbyitsprimarybankingregulatorandits
charteristerminated. Thebank’sprimaryregulatorimmediatelyappointstheFDICasreceiverforthe
bank(or,inrarecircumstances,asconservatorfortheinstitution). Byoperationoflaw,theFDIC,as
receiver,succeedstoallrights,titles,powersandprivilegesoftheinsureddepositoryinstitution,andof
anystockholder,member,accountholder,depositor,officerordirectorofsuchinstitutionwithrespectto
theinstitutionandtheassetsoftheinstitution.
ItisimportanttonotethattheFDICwearsseveralhats:(i)initscapacityasaregulator,theFDIChas
back-upsupervisoryresponsibilityforallinsureddepositoryinstitutionsandistheprimaryfederal
regulatorofstatenon-memberbanks;(ii)initscorporatecapacity,theFDICisresponsiblefor
maintainingtheDepositInsuranceFund(“DIF”);and(iii)initscapacityasreceiverorconservator,the
FDIChasresponsibilityforresolvingorrehabilitatingfailedinsureddepositoryinstitutions. Asaresult
ofthesedistinctroles,anactioncommencedbytheFDICinitscapacityasreceiverofafailedbankisnot
aclaimbytheFDICinitscorporatecapacityasaregulatoryagency.
AmongthemostimportantassetsacquiredbytheFDIC,asreceiver,istherighttobringprofessional
liabilityclaimsagainstafailedbank’sformerdirectorsandofficersanditsaccountants,attorneys,
appraisersandotherprofessionals. ProfessionalliabilityclaimsareclaimsbroughtbytheFDICto
recoverlossessustainedbyafailedbankasaresultoftheactsoromissionsofthebank’sformerdirectors
andofficersandotherprofessionals,andsuchclaimsmayultimatelyresultincivilclaims.
Followingtheclosureofaninsureddepositoryinstitution,theFDIC’sprofessionalliabilitydivisionwill
conductaninvestigationtodetermine,amongotherthings,whetherthefailedinstitution’sformer
directors,officersorthird-partyprofessionalswereresponsiblefortheinstitution’slossesand,ifso,how
toholdthemaccountable. TheFDIC’sprofessionalliabilitysectiongenerallyopensasmanyaseleven
differenttypesofprofessionalliabilityinvestigationswithrespecttoeachfailedinstitution,including,but
notlimitedto,investigationsofdirectors,officers,attorneys,accountants,fidelitybondcarriers,
appraisersandperpetratorsofmortgagefraud. TheextenttowhichtheFDICwillinvestigatethe
circumstancessurroundingthefailureofaninsureddepositoryinstitutionwilldependuponseveral
factors,includingtheextentofanylossessufferedbytheinstitution. Iftheinstitutionhassuffered
relativelyfewlosses,theFDICmaytaketheviewthatanyinvestigationorlawsuitconductedtorecoup
suchsmalllosseswouldnotbecosteffective. WhethertheFDICinitiatesaninvestigationorultimately
bringsalawsuitdoesnotensurethattheprimarystateorfederalbankregulatorswillnotbegintheirown
administrativeenforcementproceedings,orthattheDepartmentofJustice(“DOJ”),whichhas
jurisdictionwithregardtocriminalliabilityandconcurrentjurisdictionwithregardtocivilliability,will
notalsojumpintoaction. Thus,theremaybemultiplefrontstobeconcernedaboutafterafinancial
institutionfails.
Duringthecourseofaprofessionalliabilityinvestigation,theFDICmaymakeapre-litigationdemandon
theformerdirectorsorofficersofthefailedbankforthepaymentofcivilmoneydamagesandmaysenda
copyofthedemandlettertotheappropriateinsurancecarrier(s). Thepurposeofsuchdemandlettersisto
putthedirectororofficeronnoticeofapotentiallawsuitandtoprovidetherequisitenoticetothe
appropriateinsurancecarrier(s)ofa“claim”madeagainsttheinsureddirectorandofficerunderthe
applicableinsurancepolicy,inordertopreserveinsurancecoverageasapotentialsourceofrecoveryin
theeventthatlitigationiscommencedandliabilityisestablished.
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BankD&ODefenseManual
TheFDICreportedlyhasalreadysenthundredsof“demand”letterstoformerofficers,directorsandother
employeesoffailedbanks,aswellastotheirprofessionalliabilityinsurers,puttingthemonnoticeof
potentialclaims. WhiletheFDICgenerallydoesnotpubliclyreleaseitsdemandletters,theymaybecome
publicthroughdisclosureincourtproceedings,amongotheravenues. Forinstance,thedemandlettersent
byattorneysrepresentingtheFDICtofifteendirectorsandofficersofBankUnited,FSB,whichwas
closedbytheOfficeofThriftSupervisioninMay2009,wasattachedtoamotionfiledinabankruptcy
court. Inadditiontosendingdemandletters,theFDICmayissuesubpoenastotheformerdirectorsand
officersofafailedbankrequiringthemtotestifyatadepositionorproducedocumentsrelatingtotheir
personalfinancialaffairs,includingapersonalfinancialstatementshowingtheirnetworth. Such
subpoenasmaybeissuedpriortotheFDICactuallyinitiatingalawsuit.
TheFDIC’sOfficeofInspectorGeneral(“FDICOIG”)alsomayconductanindependentinvestigation
intothereasonsforaninstitution’sfailure. TheFDICOIG’sOfficeofMaterialLossReviewsis
statutorilyrequiredtocompletea“materiallossreview”withrespecttothefailureofinsuredinstitutions
thatcausemateriallossestotheDIF. AmateriallossreviewconsistsofaninvestigationoftheFDIC’s
supervisionoftheinstitution,includingtheimplementationofpromptcorrectiveaction,adetermination
astowhytheinstitution’sproblemsresultedinamateriallosstotheDIFandrecommendationstoprevent
futurelosses. TheFDIC-OIG’smateriallossreportsmayalsoidentifytheactionsoromissionsofthe
institution’sformerdirectorsandofficersasamajorcausefortheinstitution’sfailure. Assuch,these
reportsmayactasaroadmapfortheFDICandotherpotentialplaintiffstofollowinseekingtobring
professionalliabilityclaimsagainstthoseallegedlyresponsiblefortheinstitution’sfailure,including
directorsandofficers.
AnFDICprofessionalliabilityinvestigationmaytakeanextendedperiodoftimetocomplete. TheFDIC
hasastatedgoalofseekingtomakeadecisionwhetherornottopursueprofessionalliabilityclaims
againstafailedinstitution’sformerdirectors,officersandotherprofessionalswithin18monthsofthe
institution’sfailure. TheFDICdoesnotalwayscompleteitsinvestigationwithin18months,however,
andtheremaybeasignificanttimelagbetweenthedateofaninstitution’sfailureandthedateonwhich
anylitigationisactuallycommencedbytheFDIC. Inthatregard,theFDICgenerallyhasthreeyears
fromthedateabankfailsandthereceivershipbeginstobringabreachoffiduciarydutycaseagainstthe
formerdirectorsandofficersofafaileddepositoryinstitution. Aspartoftheinvestigationprocess,
however,theFDICmayseektoenterintotollingagreementswithpotentialdefendantstoallow
settlementdiscussionstoproceedwithouttheneedfortheFDICtofilealawsuitwithintheotherwise
applicablestatuteoflimitations.
Inadditiontoconductinganinvestigationtodeterminethepossibilityofbringingcivilclaimsarising
fromabank’sfailure,theFDIC’sinvestigatorswillseektoidentifysignsofpossiblecriminalactivity.
WhiletheFDIChasnocriminaljurisdiction,itmayreferpotentialcasestotheDOJ. TheFDICOIGalso
mayworkwiththeFederalBureauofInvestigationonmattersinvolvingsuspectedcriminalactivity.
Directorsandofficersofafailedinstitutionshouldbealerttothepossibilitythattheymaybethesubject
ofbothcivilandcriminalclaims. Individualsmaywishtoassertcertainrights,includingFifth
Amendmentrights,inacriminalproceedingthatmaynotbeavailableormayhaveadverseconsequences
inacivilsuit. Theexistenceofparallelinvestigationsorjudicialproceedingsmayhaveasignificant
impactondefensestrategy.
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BankD&ODefenseManual
CASE STUDY
InJuly2010,twoformerseniorofficersofIntegrityBankofAlpharetta,Georgia,a$1billion
institutionthatwasplacedintoFDICreceivershipinAugust2008,pledguiltytocriminalcharges
thatincludedcountsofconspiracytocommitbankfraud,receivingbribes,taxevasion,securities
fraudandinsidertrading. ThislawenforcementactionwaspartofPresidentObama’sinteragency
FinancialFraudEnforcementTaskForce,whichwasestablishedinNovember2009towagean
aggressive,coordinatedandproactiveefforttoinvestigateandprosecutefinancialcrimes. Thetask
forceincludesrepresentativesfromabroadrangeoffederalagencies(includingeachofthefederal
bankingagencies),regulatoryauthorities,inspectorsgeneralandstateandlocallawenforcement
who,workingtogether,bringtobearapowerfularrayofcriminalandcivilenforcementresources.
Casessuchasthispointouttheneedtotreatevenwhatmayappeartobeacivil-focused
investigationofabankfailurewithgreatcaregiventhepotentialforDOJinterventionundereither
itscivilorcriminalauthority.
WhiletheFDICisthemostlikelyplaintiffinanylawsuitagainsttheformerdirectorsandofficersofa
failedbank,otherpotentialplaintiffsincludetheinstitution’sshareholders,creditorsandemployees,other
governmentagencies,otherfederalorstatebankingregulatorsthroughtheirenforcementauthority
jurisdictionandthetrusteeoftheinstitution’sholdingcompanyiftheparentisplacedinbankruptcy.
Thesepotentialplaintiffsmay“compete”withoneanotherinordertoestablishtheirrighttosuethe
directorsandofficersofafailedinstitutioninordertorecouptheirlosses.
Whilesuchactionsarebeyondthescopeofthismanual,theFDICanditssisteragencieshavealsosought
recoveriesfromthirdpartyadvisors,vendorsandholdingcompaniesandtheirshareholdersthatmight
havebeenresponsibleforthefailureofthebank. Indeed,lawyersandaccountantshavefrequentlybeen
suedwherethereisanallegedconnectionbetweentheiractionsandalosstothebank. Holding
companiesandtheirshareholdershavenotoftenbeenthetargetofanFDICclaim,butthereisatleastone
significantprecedenttonote. AfterSuperiorBank,FSB,ofHinsdale,Illinoisfailedin2001,theFDIC
InspectorGeneralfoundthat“thefailureofSuperiorBankwasdirectlyattributabletotheBank’sBoard
ofDirectorsandexecutivesignoringsoundriskmanagementprinciples.”Withoutasuitbeingfiled,
ownersofthethrift’sholdingcompanyagreedtopay$460milliontotheFDICtosettleallclaims.
Morerecently,asaresultofthefailureofGuarantyBank,ofAustin,Texasin2009,theFDIChas
assignedcertainreceivershipclaimstotheliquidationtrusteeinthebankruptcyproceedingofthethrift’s
holdingcompany,GuarantyFinancialGroup,Inc. (“GFG”). Theliquidationtrusteehasbroughtan
actionagainstGFG’sformerparentcompany,Temple-Inland,Inc.,allegingfraudulenttransfersforthe
benefitofTemple-InlandandabreachoffiduciarydutyinconnectionwithTemple-Inland’sspin-offof
GFG. ThesecasesoftenraisemorecomplexissuesanddefensesthanD&Ocasesdo.
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BankD&ODefenseManual
FDIC INVESTIGATIVE ELEMENTS
DuringanFDICprofessionalliabilityinvestigationofthefailureofaninsureddepository
institution,theFDIC’sinvestigatorsandattorneyswillseekto:
 Determinethereasonfortheinstitution’sfailure;
 Gatherevidenceofpotentialfraudthatmayhavecontributedtotheinstitution’sfailure;
 Identifyanycauseofactionagainstdirectors,officersorotherprofessionalswho
contributedtothefailure;
 Preservebankersbondanddirectorandofficerinsurancecoverageforanypotentialor
existingclaim;
 Maintainandprotecttheintegrityofthebank’srecords;and
 Establishthechainofcustodyforsuchrecords.
The FDIC Policy Statement
IntheaftermathoftheS&LCrisis,andinresponsetoconcernsexpressedbyrepresentativesofthe
bankingindustryandothersregardingcivildamagelitigationriskstodirectorsandofficersoffederally
insuredbanks,theFDICissuedin1992aStatementConcerningtheResponsibilitiesofBankDirectors
andOfficers(“PolicyStatement”). ThePolicyStatementprovidesthatthefilingoflawsuitsbytheFDIC
againstformerdirectorsandofficersoffailedbanksisauthorizedonlyafterarigorousreviewofthe
factualcircumstancessurroundingthebank’sfailureif(1)theclaimwouldbesoundonthemeritsand(2)
litigationwouldlikelybecost-effective.
Indeterminingwhetherlitigationwillbecost-effective,theFDICconsiderswhetherthedefendanthas
sufficientpersonalassetsorinsurancecoveragetopayanydamages. Incaseswherethereissufficient
evidenceofwrongdoing,butnotenoughreliablesourcesofrecoveryfortheFDICtojustifythecostof
pursuinglitigation,theFDICstillmayreferthemattertotheinstitution’sprimarybankregulatortotake
appropriatesupervisoryandenforcementaction. Inaddition,inmattersinvolvingsuspectedcriminal
activity,theFDICmaymakecriminalreferralsandprovideongoingsupporttotheDOJ,whichalsohas
concurrentcivilliabilityjurisdiction.
AnimportantfactorconsideredbytheFDICindeterminingwhethertosuetheformerdirectorsofafailed
bankisthedistinctionbetweeninsideandoutside(independent)directors. Incontrasttoaninside
director,whomaybeanofficeroftheinstitutionoritscontrollingshareholder,anoutsidedirectorusually
hasnoconnectiontothebankotherthanhisorherdirectorshipand,perhaps,asmallornominal
shareholderposition. Outsidedirectorsgenerallydonotparticipateintheconductoftheday-to-day
businessoperationsoftheinstitution. Themostcommonsuitsbroughtagainstoutsidedirectorsinvolve
insiderabuseorsituationswherethedirectorsfailedtoheedwarningsfromregulators,accountants,
attorneysorothersthattherewasasignificantprobleminthebankthatrequiredcorrection. Inthelatter
instance,ifdirectorsfailtotakestepstoimplementcorrectivemeasures,andtheproblemcontinues,the
directorsmaybeheldliableforlossesincurredafterthewarningsweregiven.
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BankD&ODefenseManual
ELEMENTS OF AN FDIC SUIT
ThefollowingarecommonexamplesoflawsuitsbroughtbytheFDICagainsttheformerdirectors
andofficersoffailedinstitutions:
 InsiderAbuse. Thedirectororofficerengagedindishonestconductorapprovedor
condonedabusivetransactionswithinsiders.
 ViolationsofLaworInternalPolicies. Thedirectororofficerwasresponsibleforthe
failureoftheinstitutiontoadheretoapplicablelawsandregulations,theinstitution’s
ownpoliciesoranagreementwithasupervisoryauthority,orthedirectororofficer
otherwiseparticipatedinasafetyorsoundnessviolation.
 PoorUnderwritingPolicies. Directorsfailedtoestablishproperunderwritingpolicies
andtomonitoradherencetheretobyofficers,approvedloansthattheykneworhad
reasontoknowwereimproperlyunderwrittenor,inthecaseofoutsidedirectors,failedto
heedwarningsfromregulatorsorprofessionaladvisorsorotherwiseengagedinimproper
extensionsofcredit. ExamplesofimproperunderwritinggiveninthePolicyStatement
includelendingtoaborrowerwithoutobtainingadequatefinancialinformationwherethe
collateralwasobviouslyinadequateortheborrowerclearlylackedtheabilitytopay.
The Standard for Establishing Liability
AnimportantthresholdissuethatarisesinFDIClitigationagainsttheformerdirectorsandofficersofa
failedbankisthedegreeofwrongdoingtheFDICmustproveinordertoestablishliability. Inthat
regard,thecriticalissueiswhetheritissufficientfortheFDICtoprovethattheformerdirectorsor
officersengagedinmerenegligence,orwhethertheFDICmustproveagreaterdegreeofculpability,
suchasgrossnegligenceorintentionalwrongdoing. Provingagreaterdegreeofculpabilityisobviously
moredifficult. Arelatedquestioniswhetherfederalorstatelawestablishestheapplicablestandardof
careforthispurpose. CongresssoughttoaddresstheseandotherissueswhenitenactedtheFinancial
InstitutionsReformRecoveryandEnforcementActof1989(“FIRREA”).
PriortotheenactmentofFIRREA,anumberofstatesadoptedstatutesthatsoughttoinsulatebank
directorsandofficersfromliabilitybyprovidingthatabank’sorganizationaldocumentsmaylimitthe
civilliabilityofitsdirectorsandofficersbyrequiringproofofgrossnegligenceorahigherdegreeof
culpabilitytoestablishliability. InenactingFIRREA,Congresssoughttolimittheeffectofsuch
insulatingstatutesastheyappliedtolawsuitsbroughtbyoronbehalfoftheFDIC,asreceiverofafailed
institution. UnderFIRREA,adirectororofficerofafederalorstateinsureddepositoryinstitutionmay
becomepersonallyliableformoneydamagesinanycivilactionbroughtbyoronbehalfoftheFDICfor
“grossnegligence,”includinganysimilarconductorconductthatdemonstratesagreaterdisregardofa
dutyofcare,includingintentionaltortuousconduct,assuchtermsaredefinedanddeterminedunder
applicablestatelaw.
TherewassignificantdisputeastotheimpactofFIRREAonliabilitystandardsuntiltheU.S. Supreme
CourtaddressedtheissuesinAthertonv.FDIC,519U.S.213(1997). Inthatcase,theSupremeCourt
heldthatFIRREApreemptedstatelawtotheextentthatstatelawwouldrequiretheFDICtoprovea
greaterlevelofculpabilitythangrossnegligence(suchasintentionalwrongdoing)inordertoestablisha
breachofdutyofcarebydirectorsorofficersofthefailedinstitution. Importantly,theSupremeCourt
alsoconcludedthatifstatelawprovidedthatdirectorsandofficersofabankcouldbefoundliableupona
lessershowingofculpability(suchasmerenegligence),theFDICneedonlyproveabreachofsuchlesser
standardofcare(andnotgrossnegligence)toestablishliability.
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BankD&ODefenseManual
IMPORTANT DEFENSIVE CONSIDERATIONS: ACTIONS BEFORE THE BANK FAILS
Obviously,thebestwayfordirectorsandofficerstoavoidFDIClitigationistoensurethatthebank
doesnotfail. Thatcanbeadifficulttask,particularlywherethebank’sprecariousfinancial
positionresultsfromasharpdownturnintheeconomy. Thefollowingareimportanttoolstoguard
againstpotentialliability:
 EngageIndependentCounsel. Priortotheinstitution’sfailure,theboardofdirectors
shouldconsiderengagingindependentcounseltoassisttheboardindiscussionswiththe
federalorstatebankingregulatorsregardingstepsthatmaybetakentoavoida
receivership. Independentcounselmayalsoprovevaluableinprovidinga“secondsetof
eyes”andgivingtheboardindependentadviceaboutwherethebankisheaded. Separate
counselmayneedtoberetainedtorepresenttheofficersoftheinstitutioninorderto
addresspotentialconflictsofinterest.
 ReviewInsurancePolicies. Priortotheinstitution’sfailure,directorsandofficers
shouldobtainandreviewcopiesofalldirectorandofficerinsurancepoliciesanddiscuss
themwithexperiencedinsurancecounselandotheradvisers. Caremustbetakento
ensurethatcoverageunderthepolicyisappropriateintheeventthattheinstitution
subsequentlyfails. Certainexclusionsforbankregulatoryandsecuritieslawviolations
shouldbeeliminatedandcoveragebroadenedwheneverpossible. Bythetimeabankis
inatroubledcondition,itmaybetoolatetoaccomplishtheseobjectives.
 DocumentPreservation. Directorsshouldalsodiscusswithindependentcounselsteps
thatcanbetakentoensurethatdocumentationispreservedandavailableintheeventofa
seizureoftheinstitutionbyregulators.
 RequireGoodBoardMinutes. Minutesofmeetingsandreportsofexaminationarethe
backboneoftherecordthatwillexistafterabankisclosed. Withoutminutesthatreflect
theinterest,questions,understandinganddiscussionsbytheboardabouttheissuesthat
causedlossestothebank,thedefensebecomesmoredifficult. Whereadirector
disagreeswithmanagement’sapproachoranactiontakenbytheBoard,thatdirectorwill
wantdocumentationofthatfactintheminutes.
 EvaluateandAddressInstitutionandHoldingCompanyInterests. Innormaltimes,
theinterestsofaholdingcompanyanditsbanksubsidiaryaretypicallyaligned.
However,iftheholdingcompanyorthebanksubsidiarybeginstoexperiencefinancialor
otherdifficulties,theinterestsoftheseentitiesmaybegintodivergesinceregulatorsmay
arguethatatroubleddepositoryinstitutionmusttakeintoaccounttheinterestsofthe
DIF. Inthesecircumstances,directorsshouldcarefullyevaluatetheappropriaterolesto
beplayedbydirectorsorofficerswhoserveatboththeholdingcompanyandthebank,
sincetheFDICwillcarefullyreviewpotentialconflictsofinterestandbreachesofduty
thatmaybeallegedtoarisefromsuchdualservice.
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BankD&ODefenseManual
Defenses to Liability
A. Business Judgment Rule
WithrespecttoFDICclaimsagainstdirectorsandofficersinvolvingnegligenceorbreachoffiduciary
duty,thefirstlayerofdefensewilloftenberelianceuponthebusinessjudgmentrule. Thebusiness
judgmentruleprotectsdirectorsandofficersfromliability,eveniftheymakeawrongdecision,aslongas
theyactedprudentlyandingoodfaithunderthecircumstances. Undertherule,adirectorisentitledto
relyonmanagement,advisersandotherstoperformtheirdutiesproperly,unlessthedirectorknewor
shouldhaveknownsuchreliancewasmisplaced. Inappropriatecircumstances,thebusinessjudgment
rulemayshieldtheformerdirectorsandofficersoffailedbanksfromsuitsbroughtbytheFDICbased
uponatheoryofnegligenceorbreachoffiduciaryduty. Thebusinessjudgmentruleisonlyasgoodas
therecordthatwascreated,however,andaccurateboardminutesareessentialinthatregard.
InFDICv.Cassetter,184F.3d1040(9thCir. 1999),theNinthCircuitCourtofAppealsheldthatwhen
directorsactedunderthebeliefthattheiractionswereinthebestinterestsofthebank,theCalifornia
businessjudgmentruleinsulatedthedirectorsfromliability. Morerecently,inasuitagainstofficersand
directorsofIntegrityBank,aGeorgiadistrictcourtheldthatGeorgia’sbusinessjudgmentruleprotected
directorsagainsttheFDIC’sclaimsofmerenegligence,carelessness,andlackadaisicalperformanceof
theirduties.(Seesectionbelowon“RecentFDICLitigation.”)
Inanotherrecentcase,theformerCEOofIndyMacBankassertedtheCaliforniabusinessjudgmentrule
asadefensetoFDICclaims. InJuly2011,aCaliforniadistrictcourtheldthatthestate’sbusiness
judgmentruleonlyprotecteddirectorsanddidnotprotectcorporateofficers. Therulingisonappealto
theNinthCircuit.
B. Statute of Limitations Defense
ThestatuteoflimitationsmayalsoprovideadefensetoclaimsbroughtbytheFDIC. UndertheFederal
DepositInsuranceAct(“FDIAct”),aspecialstatuteoflimitationsappliestocontractortortactions
broughtbytheFDICasreceiverorconservatorofafailedinstitution. TheFDIActprovidesthat,
notwithstandinganyprovisionofanycontract,theapplicablestatuteoflimitationswithregardtoany
contractclaimbroughtbytheFDICasconservatororreceiverissixyearsbeginningonthedatetheclaim
accruesor,iflonger,theperiodapplicableunderstatelaw. Inthecaseofanytortclaim,thestatuteof
limitationsgenerallyisthreeyearsbeginningonthedatetheclaimaccruesor,iflonger,theperiod
applicableunderstatelaw. Forthesepurposes,thedateonwhichthestatuteoflimitationsbeginstorun
onanycontractortortclaimisthelaterof(1)thedateoftheappointmentoftheFDICasconservatoror
receiveror(2)thedateonwhichthecauseofactionaccrues.
ProfessionalliabilityactionsbroughtbytheFDICagainsttheformerdirectorsandofficersofafailed
depositoryinstitutionareusuallytortclaims. Thus,theFDICgenerallyhasthreeyearsfromthedateof
itsappointmentasreceiverforthefailedinstitutiontofilesuchclaims. AspecialprovisionoftheFDI
Actprovides,however,fortherevivalofcertainexpiredstatecausesofaction. TheFDIActprovides
thatwithrespecttoanyclaimarisingfromfraud,intentionalmisconductresultinginunjustenrichmentor
intentionalmisconductresultinginsubstantiallosstoafailedinstitution,theFDICmaybringsuchclaim
asreceiverorconservatorwithoutregardtotheexpirationofthestatuteoflimitationapplicableunder
statelaw,solongasthestatuteoflimitationsforsuchactiondidnotexpirenotmorethanfiveyears
beforetheappointmentoftheFDICasconservatororreceiver.
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